Callon Petroleum Company (NYSE:CPE) Q1 2023 Earnings Call Transcript

Callon Petroleum Company (NYSE:CPE) Q1 2023 Earnings Call Transcript May 4, 2023

Callon Petroleum Company misses on earnings expectations. Reported EPS is $1.94 EPS, expectations were $2.09.

Operator: Ladies and gentlemen, welcome to the Callon Petroleum Frist Quarter 2023 Earnings Conference Call. [Operator instructions] Just to remind you today’s conference is being recorded. [Operator Instructions] I will turn the call over Callon’s Head of Investor Relations, Kevin Smith. Please go ahead sir.

Kevin Smith: Thank you, Mallorie. And good morning everyone. I am joined by our CEO, Joe Gatto; our COO, Jeff Balmer; and our CFO, Kevin Haggard. During our prepared remarks today, we will reference our release on the first quarter and our recently announced Permian and Eagle Ford transactions, as well as supplemental slide decks related to both. All these materials are available on our website, at www.callon.com. Today’s call will include forward-looking statements that refer to estimates and plans. Actual results could differ materially due to risk factors noted in our presentation and SEC filings. We will also refer to some non-GAAP financial measures that help facilitate comparisons across periods and with our peers. For any non-GAAP measures reference, we provide a reconciliation to the nearest corresponding GAAP measure in the appendix to our slide deck and in our earnings press release, both of which are available on our website.

Following our prepared remarks, we will open the call for Q&A. I would now like to turn the call over to Joe Gatto. Joe?

Joe Gatto: Thank you, Kevin. Good morning everyone. We are thrilled to have you with us today on this very exciting day for Callon. We delivered another strong quarter of performance highlighted by improved Permian cycle times and continued debt reduction. I will cover the first quarter highlights later in my remarks, but we’re off to a great start in 2023. I’ll spend most of my time today discussing our accretive and transformative transaction in the Delaware Basin. Simply put, this deal is a great fit for us. It solidifies our focus and positions us as a leading operator in the Permian with more than 145,000 net acres and 107,000 Boe per day of production. It’s contiguous with and complements our existing Delaware position where we have proven history of adding value and these high quality assets will be seamlessly integrated into our development model and will immediately compete for capital within Callon’s broader Permian portfolio.

The cash portion of the transaction totaling approximately $265 million will be funded with a sale of our Eagle Ford position for $655 million in upfront cash. The transactions will be accretive to our absolute leverage and credit metrics. Our strength and balance sheet achieves our initial debt reduction milestone, allowing us to launch a share buyback program upon closing. Let’s tick through some more of the deal highlights. We’re adding 18,000 net acres and about 14,000 barrels of oil equivalent per day of production from oil assets that sit contiguous to our core Delaware acreage. We are gaining a larger footprint in the Permian and increasing the critical mass of our operations. This will create opportunities for further capital efficiency improvements and economies of scale.

This deal extends our decade-long Permian inventory of high return, oil-weighted drilling locations. We are adding 70 operated, long lateral locations, of which 90% have a positive PV-10 at $45 oil. These locations are in the well-established Third Bone Shale, Wolfcamp A and Wolfcamp B intervals with additional potential in both shallower and deeper zones. This contiguous acreage position with Stack Pay Horizons sets up perfectly the application of our proven, “Life of Field” co-development model. Today’s earnings deck highlights sustained well productivity benefits across our asset base in both the Delaware and Midland Basins that are driven by this model. These transactions will improve our operating margins due to a similar pro forma oil-weighting and lower Loe per Boe.

We have also identified more than $10 million in annual G&A savings and are confident that we will find other cost saving opportunities through the integration of the asset. This deal is priced right at 2.5 times EBITDA and provides an efficient way for us to exit the Eagle Ford and is highly accretive to key financial metrics, including a 15% uplift to adjusted free cash flow in 2023 and a 55% increase in 2024 at recent strip commodity prices. It also improves free cash flow per share by 10% in 2023, and after a full year of integration and synergies, 40% in 2024. Per share metric accretion has the opportunity to further improve even before share repurchases, since the number of shares issued to the selling parties decreases to the extent that Callon’s 20-day VWAP is above $32.50 at closing.

And importantly, we’ll focus a hundred percent of our capital and operational teams on the Permian. This will yield stronger well economics, enhanced flexibility in project scheduling and improve cycle times. Together, this will reduce our reinvestment rates and increase the conversion of EBITDAX and the free cash flow. The bottom line, we will generate more free cash flow with our investment dollars through significant capital efficiency gains and cost savings as a focused Permian company. From our forecast, you’ll see that 2023 production will be relatively unchanged with the lower capital spend, despite the fact that we are selling more current production that we are buying. Looking into 2024, we expect production to grow at a low single-digit rate year-over-year as contributions from the newly acquired assets increase.

The final point I’ll make is the culmination of everything that I have covered on this call and perhaps the most important. As you know from recent conversations, reducing debt and initiating a shareholder return program, are our top objectives for 2023. These transactions get us there on both counts. Upon closing, our debt will be reduced by more than $300 million to approximately $1.9 billion, below our $2 billion initial debt milestone. We will continue to focus on de-leveraging and see substantial progress in 2024 towards our optimal debt target of less than $1.5 billion and leverage below one times. Subject to closing, our board has approved a $300 million share buyback that we plan to execute over a two-year period. We believe that Callon’s intrinsic value proposition, which will be significantly improved by these accretive transactions, is not reflected in the public market valuation, creating a very compelling case for a repurchase program moving forward.

Before taking your questions, let me quickly give you the main takeaways from the first quarter. First, we are executing extremely well. Our first quarter financial and operating results were in line or better across all key metrics. This gives us high confidence in our ability to deliver on our 2023 business plan. We are also maintaining our focus on capital discipline and balance sheet strength. We generate $7 million in adjusted free cash flow for the quarter, allowing us to realize our 11th straight quarter of debt reduction. Second, our “Life of Field” co-development model is differentiating Callon from the pack. We provided a great deal of insight into this model last quarter and had discussions with many of you on the road over the last few months.

We’ve implemented this model consistently over the last five plus years, and it underpins our longer term asset value proposition. Third, we are seeing significant operational improvements. These gains are owed to scale, larger project sizes and deep knowledge and experience within our teams. We are drilling wells faster, pumping more completion stages per day, and using multiple rigs and completion crews on single projects. Increased D&C efficiencies, combined with our focus on simultaneous drilling and completion operations are rapidly reducing cycle times and increasing capital efficiency. All these factors contribute to strong momentum for our production outlook. We forecast that our second quarter production will be up over 5% to 105,000 to 108,000 Boe per day.

We’ve updated our 2Q guidance in today’s materials. And have also provided updated guidance for 2023 that assume six months of impact from the transactions. In closing, note that our results year-to-date are strong and in line with our top priorities of investing in premier assets, generating free cash flow and reducing debt. Today’s transaction fits us perfectly, both financially and operationally. Financially, it allows us to achieve our near term debt milestone and launch a share buyback program this year. Operationally, it solidifies our focus on the Permian Basin. Similar to past acquisitions, we are highly confident that our “Life of Field” co-development model will allow us to add significant value on our new acreage in the Permian and enhance our cost structure and capital efficiency outlook.

And finally, I’d like to personally thank our talented Eagle Ford employees for their commitment and hard work. They have done an exceptional job operating safely and efficiently and have consistently made valid contributions to Callon. This concludes our prepared remarks. We’re now happy to take your questions. Mallorie?

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Q&A Session

Operator: [Operator Instructions] Your first question comes from Zach Parham with JPMorgan.

Operator: Your next question comes from Neal Dingmann with Truist Securities.

Operator: Your next question comes from Derrick Whitfield from Stifel.

Operator: Your next question comes from Phillips Johnston with Capital One.

Operator: Your next question comes from Paul Diamond with Citi.

Operator: Your next question comes from Fernando Zavala with Pickering Energy Partners.

Operator: Your next question comes from Tim Rezvan with KeyBanc.

Operator: There are no further questions at this time. I would now like to turn the call back over to Joe for closing remarks.

Joe Gatto: Thank you everyone for joining. Hopefully we’ve been able to provide a lot of detail on a transaction that we’re very excited about here. I think checks all the boxes for what we’ve been talking about with you all over the last couple of years frankly to get to this point. So we’re all excited. I’m sure we’ll be talking more going forward, and as always, please let us know if you have any more questions. Thanks again.

Operator: This concludes today’s conference call. You may now disconnect.